Zombie private equity funds are sitting on nearly 60% more unrealized assets than they were two years ago.

Firms that have failed to make exits from their portfolios but continue to survive on management fees—known as zombie funds—have $126.6 billion worth of assets in their portfolios to exit, according to data provide Preqin Ltd., paving the way for a rise in complex restructuring deals.

Zombie funds held $80.9 billion of assets in 2013. The number of such funds has increased from 999 in July 2013 to an estimated 1,049 a year ago and 1,180 today.

A zombie fund retains its investments for longer than its scheduled holding period, often because it has failed to sell them for a profit. Preqin’s report defines such vehicles as a fund that began investing between 2003 and 2008, run by an active manager that has failed to raise a successor fund since 2008.

It said 2008-vintage funds held the most unrealized assets, worth $42.2 billion. Zombie funds with 2006 to 2008 vintages continue to hold more than $100 billion of assets.

Some of these funds have been a source of deal flow for a number of secondaries firms, many of which have been exploring fund restructurings following the crisis as an alternative to traditional secondaries in a competitive market. However, restructuring an older portfolio is often difficult because it requires the agreement of the fund’s investors, who must decide whether to support an extension to the fund’s life and a new fee and performance incentive for the fund manager.

Sunaina Sinha, managing partner at placement agent and secondary advisory firm Cebile Capital LLP, said stronger firms stood a chance at restructuring old portfolios, despite the complexities of the process.

“Every GP may have one bad vintage,” she said. “If fund five did not go so well because it was a tough vintage and you had zombie assets left in there, the likelihood of that fund being restructured and that restructuring being successful is quite high.”

She added that mediocre managers were likely to have “modest” or “minimal” chances of successfully restructuring.

Zombie funds have substantially underperformed the broader private equity market. According to Preqin, 2004-vintage zombie vehicles had a 37.4% median distribution to paid-in value, compared with 94.4% for 2004-vintage funds overall. Boom-time funds, raised in 2007, had the worst median distribution at just 21.6% to date.

Firms that are struggling to sell their portfolio and are unable to raise a next fund often see their best investment professionals depart, which typically means it will be even harder for these firms to successfully sell their remaining assets.

“That is where the worry will lie because if you are not going to raise again and if people are not coming up for retirement, they are going to look to the market and see what opportunities there are,” said Jeremy Bell, a partner at law firm Ashurst LLP.

]]>http://blogs.wsj.com/privateequity/2015/07/31/zombie-private-equity-funds-sit-on-127-billion-asset-pile/feed/0Committed: Calstrs Constructs First Infrastructure Co-Investmenthttp://blogs.wsj.com/privateequity/2015/07/31/committed-calstrs-constructs-first-infrastructure-co-investment/?mod=DealsMain
http://blogs.wsj.com/privateequity/2015/07/31/committed-calstrs-constructs-first-infrastructure-co-investment/#commentsFri, 31 Jul 2015 17:30:22 +0000Dawn Limhttp://blogs.wsj.com/privateequity/?p=18734The California State Teachers’ Retirement System made its first infrastructure co-investment this year, backing an asset based overseas, said Paul Shantic, the pension fund’s director of inflation-sensitive investments.

The $191.4 billion state pension investor, which declined to provide specifics on the deal, has signaled plans to take a more hands-on role in infrastructure investing.

“That ability to move fast gives us credibility moving forward to look at other co-investments,” Mr. Shantic said to a roomful of investment managers and state investors at the Pension Bridge 2015 Private Equity Exclusive conference in Chicago.

Calstrs mobilized for due diligence and moved on the investment within a roughly 30-day window, he added.

U.S. public pension funds lack the early-mover advantages and deep institutional knowledge some of their counterparts in Canada and Australia have in the direct infrastructure deal space, according to industry executives. Calstrs, the nation’s largest public pension fund after the California Public Employees’ Retirement System, established its infrastructure portfolio in 2010 and is looking to gain co-investing experience.

Calstrs is drawn to assets that could serve as a hedge against declines in the purchasing power of money, and protect its ability to pay its obligations to pensioners. The pension system slots private infrastructure investments within its inflation-sensitive sleeve.

“Our first co-investment had a nice inflation sensitivity to it that we could easily model,” Mr. Shantic said. “Those are the kind of projects that are going to attract our attention.”

He also said that currency risk, in the past year, “has become a larger topic of conversation” at the pension fund, as its infrastructure investments could be impacted by fluctuations in the euro and Australian dollar.

The pension fund has been in talks with other institutional investors on how it could get stronger collective rights by pooling capital with like-minded peers, LBO Wire previously reported.

Calstrs ‘s most recent allocation targets call for an interim 1% of its pool to be carved out to inflation-sensitive assets, though its long-term strategic goal is to target 6% of the portfolio for those assets. The pension fund is reviewing those targets.

Pockets of the core infrastructure space, which may include bridges, tunnels and toll roads, are getting crowded, providing a check to some investors’ enthusiasm.

“I think we’re all becoming a little bit concerned that prices are going to continue to get bid up,” Mr. Shantic said. “We’re a little worried people are going to love it to death because infrastructure is a good story. You want to say you’re invested in the infrastructure of the country and the region.”

Top story in this morning’s LBO Wire:Pine Brook Partners committed $100 million to Cahill Services LLC, a provider of rental services to the oil and gas, refining, industrial, petrochemicals and utilities industries. Pine Brook Managing Director Michael E. McMahon tells Shasha Dai that the commodity price downturn presents an attractive opportunity for the startup. “Sometimes, the best time to build a business is when things are out of favor. Interested competitors are distracted. Some are overlevered. Public companies are fighting quarterly earnings.”

(LBO Wire is a daily newsletter with comprehensive analysis of all the investments, deals, fundraisings and personnel moves involving private equity firms. For a two-week trial, visit our homepage http://pevc.dowjones.com, scroll to the bottom and click “try for free.”)

Elsewhere on the Web:

Relativity Media, the film and television studio behind such recent releases as “The Lazarus Effect” and MTV’s “Catfish,” filed for chapter 11 bankruptcy protection Thursday and put itself up for sale. A group of Relativity’s lenders will serve as the stalking horse, or lead bidder, for the Yucaipa Cos.-backed business’s assets, Patrick Fitzgerald and Erich Schwartzel report for The Wall Street Journal.

Carlyle Group has parted ways with the founders of its Vermillion commodity hedge-fund firm after its flagship fund shrank from $2 billion to less than $50 million in assets, Christian Berthelsen and Rob Copeland report for the Journal.

Before joining Summit in 1992, Mr. Trustey was a consultant with Bain & Co. He also served as a captain in the U.S. Army. He held a bachelor of science degree in chemical engineering from the University of Notre Dame and a master of business administration degree from Harvard Business School, where he was a Baker Scholar.

“Joe was uniquely distinguished in so many ways: as a partner, a leader and a friend. He was a wonderful husband and father who also cared deeply for those with whom he worked both inside and outside the firm,” Marty Mannion, a Summit managing director and chief investment officer, said in the statement on the firm’s website. “We cannot express how much we will miss his presence in our lives.”

The National Transportation Safety Board said it is investigating the accident.

Financial data is a $42.7 billion industry and should grow to $55.2 billion by 2018, according to a new report by Outsell Inc., a research advisory firm catering to data-analytics firms.

The ten largest firms account for about two-thirds, or $28.2 billion or revenue, though the overall space is highly fragmented. There are thousands of companies, selling everything from geopolitical heat maps to real-time tracking of cargo ships, and there should be an acceleration of industry consolidation over the next 18 months, said William Jan, Outsell’s lead analyst of financial-information firms, in a phone interview. There could be a deal every month, he said.

“There’s this utopic view of analytics, where you pair up two different sets of data to come to previously unknown correlations,” said Mr. Jan. For instance, there could be a potential link between train delays in Mumbai after a holiday and a subsequent downtick in certain economic measures.

Outsell’s Information Industry Database

There’s also a turf war between established players charging thousands of dollars a month, per user, to access a broad array of market data. Those entrenched firms are encountering new entrants offering up granular, niche data—and selling it a la carte to hedge funds, law firms and financial institutions.

“It’s causing pricing pressures to the big players,” Mr. Jan said. “Clients are saying we can deal directly with these newer firms. There is an internal tug of war going on.”

The biggest players are Bloomberg at $8.2 billion in revenue, Thomson Reuters at $6.3 billion and McGraw Hill at $4.2 billion, Outsell says. Other large players include Moody’s Corp., CoreLogic and Fitch Group.

Outsell says more than half, or 56%, of the industry is based in the U.S. About 30% is concentrated in Europe, the Middle East and Africa, while Asia accounts for just 9%. Latin America is 5%.

SNL is a popular tool among banks, but also law firms, insurers and accountants—a market that McGraw Hill’s S&P Cap IQ had not previously captured in a significant want, Mr. Jan said.

David Rubenstein, right, with William Conway, co-founders and co-chief executives of Carlyle Group.

Simon Dawson/Bloomberg News

Carlyle Group’s hedge fund group may be under fire because of poor performance, but according to the firm’s co-chief executives the firm is facing another challenge: too much money trying to get into its funds.

Carlyle has benefited as cash-rich institutional investors look for places to park their capital, co-founder and co-chief executive David Rubenstein said on a call Wednesday to discuss the firm’s second quarter earnings. The firm secured $55 billion in gross commitment to its funds and various investment strategies since the beginning of 2013, in the best fundraising period since the exuberant years of 2007 and 2008.

In the second quarter Carlyle received $5.7 billion in gross new fund commitments, he added. The firm announced Wednesday the closing of its fourth European fund at its 3.75 billion euro hard cap following a late burst of investment interest.

Getting money may not be a problem for the Washington, D.C., firm, but investing it is getting more challenging. Bill Conway, also a Carlyle co-founder and co-chief executive, said that across strategies, the firm had deployed $3 billion of capital so far this year versus an average investment pace of about $10 billion.

But Mr. Rubenstein said despite the competitive deal-making environment, the “biggest problem I’ve been dealing with in the last couple of weeks” is trying to accommodate investors ”because there’s too much money coming into [a] fund.”

Carlyle’s limited partners’ “biggest concern is will we take their money,” he said.

Carlyle’s real headache lies with its $4.9 billion hedge fund unit, Claren Road Asset Management, which faces the threat of investor withdrawal based on performance. The Wall Street Journal reported consultant Cliffwater LLC is advising investors to pull their money from Claren Road after its flagship fund posted a 4.8% loss for the first half of this year. Claren Road recorded a 10% loss last year in its first down year since its inception in 2005.

Mr. Conway said Carlyle is working to “help sustain and restore investor confidence” and that Claren Road doesn’t have a systemic problem with operations or its management. He also said the firm turned away $1 billion in investor allocations a year ago.

But he said that Claren Road needs to bolster its performance. “These things can turn pretty quickly,” Mr. Conway added.

“In times of distress around the world, people like to put some money in real estate,” Mr. Rubenstein said.

Carlyle has a two-prong real estate strategy: Its core strategy is to find opportunities which will generate “high-teen returns,” but recently it delved into what the firm calls a “core plus” strategy, which gives investors 9% to 11% rate of return.

HGGC has finalized an agreement to make a growth investment in Dealer-FX, a provider of customer-experience and process-automation software to original equipment manufacturers and auto dealerships, Lillian Rizzo reports. The deal, in which the firm will acquire a majority stake, falls “within the fairway” of HGGC’s typical investment range of $25 million to $100 million, said Jake Hodgman, principal at HGGC.

(LBO Wire is a daily newsletter with comprehensive analysis of all the investments, deals, fundraisings and personnel moves involving private equity firms. For a two-week trial, visit http://on.wsj.com/DJPEVCNews, scroll to the bottom and click “try for free.”)

Elsewhere on the Web:

Blackstone Groupsold its 97.9% stake in Indian auto components maker Agile Electric Sub Assembly Pvt. Ltd. to a group of buyers including Japan’s Igarashi Electric Works Ltd., according to Reuters.

Pet supplies retailer Petco Animal Supplies Inc., backed by TPG Capital and Leonard Green & Partners, has been in talks with investment banks in recent weeks for an initial public offering, according to Bloomberg News.

Goldman Sachs Group Inc. is securitizing a loan to Blackstone Group backed by commercial real estate across the U.K., according to the Financial Times. The new deal is based on 95% of a £680 million single loan and is expected to price on Friday. The loan, part of a refinancing on assets acquired by Blackstone several years ago, is backed by a portfolio of 42 logistics assets throughout the U.K.

]]>http://blogs.wsj.com/privateequity/2015/07/30/the-morning-leverage-pai-partners-selling-swissport-for-2-81-billion/feed/0Private Equity-Backed Companies Expand Revenue Faster Than Peershttp://blogs.wsj.com/privateequity/2015/07/30/private-equity-backed-companies-expand-revenue-faster-than-peers/?mod=DealsMain
http://blogs.wsj.com/privateequity/2015/07/30/private-equity-backed-companies-expand-revenue-faster-than-peers/#commentsThu, 30 Jul 2015 10:45:38 +0000Shasha Daihttp://blogs.wsj.com/privateequity/?p=18726For the last six quarters in a row, private equity-backed midmarket companies have posted faster revenue expansion than those not backed by private equity, according to data from the National Center for the Middle Market.

The center polled about 1,000 senior executives of U.S. midmarket companies in June. The survey shows that for the second quarter through June 12, private equity-backed businesses reported a mean revenue growth of 8.8% over the trailing 12 months, compared with 5.7% for companies not backed by private equity and 6.6% for all businesses in the survey.

The center defines midmarket companies as those with annual revenue of $10 million to $1 billion.

The finding was consistent with those for the previous five quarters in a row, according to the center, which is a partnership between GE Capital and the Ohio State University’s Fisher School of Business.

“There is a certain group of [private equity-backed companies] that were bought from family-owned businesses,” said Thomas Stewart , executive director of the center. The new sponsors have since reinvested in the businesses in areas that have been underinvested during their previous ownership. “New gas has been put into a really good car,” said Mr. Stewart.

“In general, in the middle market, private equity firms do not strip companies, take them apart and sell off pieces,” he added.

On a flip side, private equity-backed companies had a higher average debt-to-asset ratio compared with companies not backed by private equity-24.9% versus 19.8%.

As a whole, midmarket companies–regardless of their ownership structure–have seen revenue expansion slowing to 6.6% during the second quarter from 7.4% in the previous quarter, reflecting the choppiness in the U.S. economic growth.

Write to Shasha Dai at shasha.dai@wsj.com Follow her on Twitter @ShashaDai1

After a brief slowdown during the first quarter, private equity investors resumed selling everything that wasn’t nailed down, a trend that is likely to continue well into the next quarter.

U.S. firms racked up $125 billion of exits during the second quarter, the highest level on record and an 80% increase from first-quarter exits, industry trade group Private Equity Growth Capital Council reported, citing data from PitchBook.

The increase in dispositions comes as firms continue to hoard dry powder and the pace of investment remains subdued. Reluctant to compete against cash-rich corporates and risk repeating the mistakes of the past decade’s buyout boom, some firms have been biding their time, or exploring unorthodox transactions rather than jumping head-first into the mergers and acquisition frenzy.

PEGCC’s numbers focus on U.S. investments and exits, but a host of macro-economic concerns around the world are factoring into firms’ investment pace domestically and abroad. Bill Conway, Carlyle Group 's co-founder and co-chief executive pointed to the divergence of exits and investments Wednesday during a conference call to discuss the firm’s second-quarter financial results.

Citing high asset prices, uncertainty in Greece, volatility in China and the frothy credit markets, Mr. Conway said that across strategies, the firm had deployed $3 billion of capital so far this year versus an average investment pace of about $10 billion.

This flood of cash is creating a conundrum for the pensions, endowments and other institutional investors that back private equity firms as they wrangle with asset allocations. The cycle of feast and famine with distributions also risks becoming magnified the longer private equity firms wait to invest their capital.

1. Distress remains hard to find. With interest rates near zero and the U.S. economic climate benign, the default rate among U.S. corporate high-yield debt issuers sits at just 2% the year through June, according to Moody’s Investors Service. As such, “the supply of corporate distressed debt opportunities has been muted,” Oaktree co-chairman Bruce Karsh said Tuesday.

2. Distressed bets have burned investors lately.Meanwhile, some popular trades haven’t played out as investors had hoped. Oil company debt meant to help explorers and producers ride out a price slump has largely traded down after issuance. Popular wagers tied to litigation involving Washington Mutual Inc. and Nortel Networks Corp.have stung investors.

In “energy, metals and mining, some of the consumer retail, there has been a lot of pain in performance out there, along with names like Puerto Rico—which we’re not involved with—or liquidation trades like WaMu or Nortel,” said Jim Zelter, Apollo’s global head of credit.

Poor distressed-debt performance in Oaktree’s closed-end funds offset gains elsewhere, one Oaktree executive said. Mr. Karsh said “our distressed debt returns over the past 12 months have been below historical norms.” He added though, many of the firm’s most profitable investments have struggled out of the gate.

3. Energy among pockets of opportunity. Around the credit landscape, “the dominant themes include distressed real estate in Europe, European credit, energy and opportunities created by the pullback of financial institutions globally,” Blackstone Chief Executive Stephen Schwarzman said earlier this month.

Oaktree’s looking to make relatively safe loans to “financially distressed companies” that are secured by valuable assets or have high priority in the order for repayment in bankruptcy, Mr. Karsh said. It also may purchase “existing energy and commodity-related securities at deep discounts.”

Apollo co-founder Joshua Harris says “we see it getting worse before it gets better” in the oil patch. “We’ve sat back and waited. We feel like the market is coming towards us.”